11/15/2011 3:26 PM ET|
How Target is gaining on Wal-Mart
Target is definitely not matching Wal-Mart on price, either. That would be tough to do given Wal-Mart's size, which allows it to drive down prices from suppliers. A recent comparison of prices by retail sector analysts at JPMorgan Chase showed that Wal-Mart prices for groceries and consumables were 7% lower than those at Target.
And Target won't be passing Wal-Mart overall anytime soon. Wal-Mart was the nation's biggest retailer at the start of this year, with $421.9 billion in annual global sales. Target placed third, with $65.8 billion in annual sales, according to the National Retail Federation.
Still, the logic is similar. Target wants to use groceries to lure shoppers in more often, assuming they'll wander into other areas of the store to buy stuff that sells with higher profit margins -- its cheap-chic merchandise.
The other change at Target that's making it more like Wal-Mart is a loyalty program called REDcard Rewards. This program offers a standing 5% discount on anything purchased with a Target credit card or debit card. As with groceries, the goal is to get shoppers in more often so they buy enough extra stuff to make the discounts pay off for Target.
And the winner is . . .
How's all this working out? Pretty well, but it's still a mixed picture.
First, the good news. So far this year, Target has been beating up Wal-Mart in sales growth, points out Drew Weitz of Weitz Funds, which owns Target in its Weitz Partners III Opportunity fund (WPOPX), which outperforms peers over the long term and carries a five-star rating at Morningstar. The introduction of groceries and the 5% discount have a lot to do with this advantage.
Target posted 3.9% sales growth in the second quarter, following a 2% gain in the first quarter. In contrast, Wal-Mart sales contracted again in the second quarter, capping nine straight quarters of sales declines. More recently, Wal-Mart has finally been posting slight sales gains since July and was able to break the string of declines in this week's earnings report. But Target sales have been going up much more, at 5.3% in September and 3.3% in October.
Target believes PFresh is responsible for a percentage point of the year-over-year sales gains cited above. "In addition to telling us that they like their new store, guests show us by increasing their visits and spending in remodeled stores," CEO Gregg Steinhafel said in the company's second-quarter conference call.
The discount card is also helping. Converting customers to a REDcard typically increases store visits by 40% to 50%, says Target. And people who already had a Target card and activate the 5% discount increase visits by about 10%. By the end of the year, Target thinks the 5% discount will be boosting year-over-year sales by 2 percentage points.
A big problem, though, is that all of this is causing profit margins to slip, at least by one measure, as predicted by Morningstar's Keara. Gross margins, defined as sales minus the cost of goods, have been falling slightly. That's not a trend you want to see in retail. But it might not tell the whole story, for two reasons.
First, when you factor in fixed overhead, as well as the cost of the stuff that's sold, you can see the beginnings of a payoff in Target's strategy. Simply put, overall sales are growing faster than this broader measure of costs, says Weitz. So while Target is boosting sales by adding lower-margin goods and discounts, it's layering more sales on top -- a recipe for success, says Maile Clark, an analyst with MFS investment Management.
A nagging problem, though, is that customers stepping up their grocery shopping aren't wandering over into other parts of the store to buy clothing and household furnishings often enough. While the food business is growing by leaps and bounds -- sales are growing by around 15% annually -- Target is seeing only "a very slight increase" in the sales of other stuff as a result, says Steinhafel.
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I shop at Walmart, some are nicer and cleaner than others, especially where I live in FL.
I am guilty of shopping at Walmart, they have the lower prices and these days we have to watch every penny. I am not thrilled with Target everything is much higher in prices whether groceries or their clothes. I like a one stop shop idea. I don't like traveling from one store to another.
Target is nicer and cleaner of the two, they just need to lower their prices.
As for keeping the stores open on Thanksgiving that is ridulous, none of these stores need to be open on Thankgiving or X-Mas Day. I can remember years and years ago, all stores were closed on Sundays, and Thanksgiving & X-Mas even closed early the night before, this gave employees a day off to enjoy their families. These stores are not happy making a profit, they get Greedy and the employees suffer.
I would like to see that these 2 stores will start buying made in the USA. I go out of my way to find those items. We need to bring back the American jobs in our country.
Please explain...inquiring minds would like to know.
My wife and I have shopped both stores and on every occasion, we have always preferred Target to Wally World. Target is always cleaner, always more organized and unfortunately I have had as much as I can tolerate of Wall Mart clientele. Other issues like cashier availability, long lines and store personnel attitude are night and day, with Target always ahead of Wall Mart. That is just the surface. IMO.
All for Profit and more profit and record setting years and never being happy with a healthy return only if it is more than last and the employee gets......no more than last year..
My experience with Target is that their employees are intelligent, positive and happy to see you as a customer. This is how Walmart got their start. Now Walmart employees are sullen, angry and uninterested in serving their customers. The experience of shopping between Target and Walmart is at opposite ends of the spectrum. While price is important, I'll pay a few cents more to patronize a business that believes in customer service.
For the record!!!! Target is an American owned store that sells American made merchandise.
Wal-Mart is is largest importer of goods from China. Has several special ships charring goods from China, Malaysia, etc arriving each day to dump their goods on wal-mart shelf's. the ships return to their country EMPTY! NO AMERICAN EXPORTS!.
Most every thing you need is made in America. ABC news has a complete list, and I thinks msn- google does also. When you go to purchase any merchandise ask "Please show me only the product's made in America" not the stuff where they only sew the label on in America.
It is time to get smart, If you want better living, good wages and a better future, Buy American and get rid of all the politicians that signed the pledge to work for corporations not Americans.
Wal-Mart's sales are slipping for one simple reason. Their customer service sucks, big time. Case in point: Awhile ago I purchased tires from their website. On the receipt, it clearly said to go to the Tire and Lube Center to pick them up. So, having excellent reading comprehension skills, that's what I did. Well, the clerk there acted as if I had kicked his puppy, rudely telling me I had to report to customer service to sign for them. God forbid he pick up the phone and have them brought to him! By the way, if people are thinking this was an isolated incident, it's not. I find their employees to be either apathetic to their customers needs or so wrapped up in their assigned tasks helping customers is an annoyance.
Until Wal-Mart loses this delusion that they're the only game in town, that people should be grateful to shop there, they have nowhere to go but down.
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